Customers love choices. Be it a variety of styles, a riot of colors, or an assortment of flavors, they like diversity in shopping experiences. And to woo them, brands often resort to introducing new product lines.
They eventually fall into the tricky allure of SKU proliferation. In this article, we analyze SKU proliferation, how it can impact your eCommerce business, and what you can do to prevent falling into a trap.
Understanding SKU Proliferation: A Tricky Formula in Business
In logistics, SKUs (Stock Keeping Units) are the unique barcoded numbers or labels assigned to each stock a company owns and intends to sell. Keeping the specifics aside, SKUs represent the units of your stock.
SKU proliferation is the practice of adding more units or SKUs to existing inventory, mostly for reaching new customers and getting more sales. Take, for example, a tea brand that launches new flavors to target changing customer preferences. Or a shoe brand introducing a new product in line with its competition.
Adding new products by and itself is often a necessary condition for scaling businesses. The problem of escalating inventory occurs when it's done on an unprecedented scale.
In the above example, say the tea brand releases a new fruity oolong tea flavor to complement a growing trend for oolong teas. Seeing a new revenue stream, it decided to launch a series of other flavors- nutty, woody, aromatic, milk, etc. Suddenly there comes an influx of product range or SKU proliferation.
But customers fixate on one product type or move on to an entirely new flavor profile, say rooibos teas next. This means all your previous efforts have to be wasted. On top of this, you’ll have to procure rooibos tea from new suppliers and make a new product. You are thus left with stockpiling and wasted resources, time and money.
This situation can lead the brand to an excess of tea variants having slow demand. In worse cases, they can even become dead stock. This is the problem of SKU proliferation.
Is SKU Proliferation Risky for eCommerce Business?
Bringing new products and adding to the existing inventory have its perks. It lets the business grow, adds more revenue generation opportunities, dissipates risk associated with only one product, and stays in tune with its competitors. Sometimes, brands offer premium versions of their existing products for segmented customer experiences.
This brings us to an important question. If there are so many benefits to growing your inventory with more SKUs, what exactly makes SKU proliferation dangerous? The truth is unchecked and unorganized SKU proliferation is a risky move.
It requires added production capacity and expansion of warehouse space to stock them. It needs considerable marketing, product cataloging, order management, fulfillment strategy, and inventory control. All of these add layers of complexity and costs for the brand. If demand stagnates, SKU proliferation will disrupt business growth and stability.
A rise in numbers corresponds to a rise in processes to keep track of them. From production to fulfillment, SKU proliferation requires an endless stream of processes to be taken care of and without fail.
What Causes SKU Proliferation?
Every eCommerce business has different customer segments and targeted demographics they want as shoppers. A lot of attention is spent on acquiring customers with products that offer them value and a solid reason to keep returning for more.
It is tempting to micro-target each customer, from impulse buyers to discount seekers and brand loyalists to problem solvers. Take the case of beauty brands that often introduce multiple products based on different skin tones, complexions, ingredients, and prices. With endless variety comes endless SKUs.
However, what can lead to SKU proliferation faster than adding new product lines is poor inventory control. With a dearth of inventory monitoring, it can result in the accumulation of low-performing stocks that you can be unaware of. This can lead to a stockpiling of either slow-moving SKUs or worse obsolete items, making them an irrevocable loss.
Demand is another key reason why brands look to add more SKUs. Add to it the pressure of keeping pace with industry trends and customer reviews. They can compel brands to add more diversity in product catalogs. In general, it also leads to an inpouring of SKUs that are either sourced or manufactured.
The Real Pain of Unchecked SKU Proliferation
Unmonitored SKU proliferation can cause a dynamo effect, throwing off all balance in business operations. From taking up precious warehousing space to inducing hefty carrying costs in shipping and distribution, it can generate a real loss. Here are some of the most of its glaring pain points:
1) Loss of Capital Spend
SKU proliferation raises the threat of SKUs lying dormant in the warehouse. Accompanying it is the anxiety of capital depreciation and a rise in costs. The latter includes warehousing cost, maintenance cost, distribution cost, shipping cost, and, if things don’t go well, then returns.
There is the real risk of trapped capital that can eventually flatten the bottom line but potentially disrupt the next production cycle. SKU proliferation also increases the liableness that your funds will be locked in inventory shelved in storage racks. This can take a share out of the investment required for implementing technology, hiring workers.
2) High Storage Cost
Warehousing or storing your inventory is a black hole of costs that all retailers who rent storage space are familiar with. It's a common fact that the more SKUs a company has, the higher its storage costs. This is why businesses try to optimize space by getting a quick product turnover rate.
Adding more to your inventory with slow demand can thus be detrimental. Deadstock aggravates the situation further with wasted storage, added costs, and even forcing brands to invest in another warehouse.
3) Risk of Inventory Obsolation
Adding any new product requires on-point demand planning, especially a firm grasp of the market situation and customer expectations. In situations where demand fluctuates and popular social media shopping trends disappear, SKU proliferation leads to a pile of unwanted stocks.
The situation can get trickier if a product with slow turnover time expires, especially in cases of beauty and cosmetics, groceries, and perishables. This can either compel the brand to design a flash sale, donate the leftover inventory, or dispose of it. Whatever the case, the net earnings line takes a major blow.
4) Incohesiveness in Order Fulfillment
To facilitate smooth order fulfillment, speedy operations are a necessary prerogative. An agile fulfillment system requires fast picking, packing, labeling, and quick handover to the shipping partner. All of these steps tend to slow down if there is a massive inventory count.
With swelling SKUs filling mobile racks, pallets, totes, and bins, your pickers will have to find the right SKU in the right place at the right time. Or else there will be inaccurate items in the final parcel. With increasing stocks, it becomes mandatory to exercise control and track the flow of goods, or else the entire order fulfillment process is thrown into disarray.
5) Hindrance in Supply Chain Management
An increase in inventory count can lead to major issues in fulfillment. Many retailers now offer on-demand delivery and expedited delivery options like on-demand and next-day delivery. To facilitate this, they tend to distribute inventory in multiple warehouses and increase the SKU count in the process.
With too much inventory, you can find it hard to keep track of SKUs in multiple locations and monitor their flow in different channels. You can possibly face stockouts without proper inventory management.
Top 5 Strategic Ways to Resolve SKU Proliferation
Here are some of the ways you can combat the issues of SKU proliferation:
1) Resort to Strategic SKU Rationalization
Logistics experts believe that SKU rationalization is the direct solution to SKU proliferation, especially in cases of dead or slow-moving inventory. SKU rationalization is a process of analyzing or auditing SKU performance for optimized inventories. In other words, it is the technique whereby brands identify the SKUs that have generous sales and drive up profitability.
Analysis can involve parameters such as turnover time, storage capacity, fulfillment expenses, capital spent on procurement, production, return rates, etc. With the result, you can decide whether to discontinue an SKU, thereby improving your catalog and lowering your carrying costs. SKU rationalization ramps up inventory management and fulfillment.
2) Implement Demand Forecasting
One of the main factors fuelling SKU proliferation is changing demand and the associated need to revamp inventory. To avoid an increase in the stockpile of dead inventory, having a diligent demand forecasting system is the best coping mechanism.
Forecasting demand is the method of using historical sales data and predictive algorithms to estimate demand in the upcoming period. Demand forecasting allows you to make informed supply chain decisions, including production cycles, allocating funds, storage requirements, etc. With this, you can forestall the chaos often brought about by unpredictable SKU sales.
3) Improve Inventory Management
One of the dire effects of SKU proliferation is upending warehouse management and disturbing the flow of inventory control. With an influx of SKUs, it becomes difficult to track them, upgrade inventory count and even reorder items on time. To tackle this, you can invest in improving inventory and warehouse management with automated technologies.
Having inventory management software lends many advantages. One, you can have a real-time view of inbound and outbound inventory, monitor flow and SKU locations, and prevent stockouts. Additionally, an automated system can streamline reorders, keep track of sales, and offer detailed reports on SKU performance. With this data, you can then do SKU rationalization.
4) Re-evaluating Warehouse Efficiency
Warehousing, fulfillment, and shipping are intricately linked with SKU proliferation. It goes without saying that streamlining and organizing the supply chain comes at the forefront of reducing proliferation issues. Take the case of your storage system, and determine the ways you can accommodate SKUs in different locations.
For example, using mobile racks can make it easier for your pickers to locate items and retrieve them. Additionally, this can help them keep track of stocks and replace non-performing SKUs with those in high demand.
5) Manage Dead Stock and SKU Portfolio
Before you move onto a fresh, optimized start with inventory planning, make a game plan for your aging SKUs. You can identify stocks with low demand using your inventory management software or manually analyze the sales record. For example, if an SKU is idle for more than 90-180 days, it can be considered a dead stock.
There are a couple of things you can do to manage obsolete SKUs. One, you can offer aggressive discounts or arrange a flash sale or provide combo deals. This can unburden you from some of them. Two, you can donate unexpired inventories and create space to stock new, well-performing ones. Three, you can dispose of them, but regard this as a last resort.
SKU proliferation is sometimes the inevitable result of growing your business. However, ill-planned SKU growth can be a problem that targets your bottom line and fulfillment efficiency. In this article, we have described the common causes leading to SKU proliferation and the best ways you can tackle the issue. With careful planning and operational efficiency, you can introduce new products without fearing incurring a loss.
1) How does SKU proliferation impact supply chain efficiency?
SKU proliferation has a direct impact on warehousing and fulfillment. Storage space can run out with an influx of SKUs, and fulfillment will slow down. Moreover, when SKUs don’t sell well, it can lead to a situation of capital trapped in inventory and cause a lack of funds for other key areas of business.
2) How can automation help with SKU Proliferation?
An automated inventory management system can unknot a lot of issues associated with SKU proliferation. It can shed much-needed visibility of inbound and outbound inventory, keep track of stockouts and reorders and make detailed inventory audits. All of these can help retailers take proper steps to manage dead inventory and streamline order fulfillment.